Why Should Your Business Use Accruals Based Accounting….

As a business owner one of the tasks at hand is to promote and package your business is a stable business entity that is credit worthy and an attractive investment.

To do this you need to continually monitor your business results in a consistent and accurate way.  With cash basis accounting revenues are booked when you get paid, and expenses are recorded when they are paid.  When accrual basis accounting is used the revenues are booked when you earn them and expenses are matched to the period in which the benefit is derived.

Though the cash basis is the easiest to implement, it is really just a check register for the most part.  This basis of accounting provides very distorted and misleading information.  For example if you provide consulting services and you receive payment at the end of the project.  As the project progresses costs are recorded and revenue is not, then at the end of the engagement an invoice is prepared and sent to the client.  Under cash basis the revenue will be recorded when the invoice is paid.  Therefore the business would look like it is not doing well during the months where the work is done and then will look unrealistically good in the month the revenue is recorded because it is not matched with the costs.  Not only does not matching the expenses with the derived benefit give the business owner a false picture of the business results it gives potential lenders or investors a false picture. 

When an owner is packaging the business to potential lenders demonstrating a good understanding of the business is very important.  Being able to understand trends and explain them will be an indication to the lender that your business is credit worthy.  With cash basis financials it becomes very difficult to understand, explain and predict business trends which make it harder to run your business and get good results.

Accrual basis accounting is more expensive, because it requires business accounting software and a person capable of using it.  The expense is worth it because it will help the business owner plan and overt cash shortages, keep costs under control because over spending is more visible, and will make it easier to obtain terms with vendors and banks.   Getting favorable terms with vendors and banks can save a company a lot of money.  If using credit cards is the only way a business has to get financing the cost of this will be much more costly than with vendor terms or a bank line.  Also, when an owner demonstrates a strong business acumen and understanding of the business demonstrated by good accrual based financial statements a bank lending officer would rightly consider that business less risky thereby getting more favorable loan terms.

Since your goal as a business owner is to grow your business in the most profitable way possible, it should make sense that it is a sound decision to invest in accrual based accounting from the start.  Being able to display an accurate picture of your business on a consistent ongoing basis not only provides the information necessary to run your business better but also improves the cost of obtaining the cash flow necessary to grow your business cost effectively.

e-Bookkeeping provides affordable virtual accounting department services. If you have questions about these services contact Diane Perusse @877-292-9684 ext 3, or diane@e-bookkeepingonline.com

Are Internal Controls Too Expensive?

When inquiring with small business owners about Internal Controls the answer is almost always, “we can’t afford the staff to have Internal Controls” or “we are too small to need Internal Controls”.


At the highest level Internal Control is defined as:

Systematic measures (such as reviews, checks and balances, methods and procedures) instituted by an organization to (1) conduct its business in an orderly and efficient manner, (2) safeguard its assets and resources, (3) deter and detect errors, fraud, and theft, (4) ensure accuracy and completeness of its accounting data, (5) produce reliable and timely financial and management information, and (6) ensure adherence to its policies and plans.

Very boring to the average small business owner who is occupied everyday with the demands of running a business. Because small businesses usually have active and involved management, “trusted” staff and uncomplicated procedures, the small business owner often feels as though Internal Controls are not necessary. Well tell me if you feel that way after this story.

A few months ago a friend that I work with on a Non-Profit Board called needing help. His Accountant had been out for three weeks due to a breakdown. The company experienced impressive year over year growth in this rough economy, which I thought was impressive and made me look forward to working with them.

When inquiring about the Accountants duties, trying to find the right place to jump in and get the most important things done first I became concerned. This person had complete responsibility over everything in the accounting department. She invoiced the customers, entered the bills, made the deposits, wrote the checks, “reconciled” the bank statements and credit cards and was virtually the only interface with the tax accountant. She also had the entire bank and credit card logins, as well as the ability to send eft’s. This is always concerning and unfortunately way too common.

It was not long, less than 24 hours when my concern became founded. First we found that the Accountant was paying her personal SDG&E bills along with the Company’s. Then we found that the credit card bills were not really reconciled in months, the steps were followed but entries were made to force the balance to reconcile. Next, the eft’s used to process payroll did not in fact equal the actual payroll and Petty Cash was missing. Everywhere we looked we found signs of theft and were able to accumulate over $30,000 of misappropriated funds. There was more to be found as we only went back a few months, but the owner did not want us to look anymore as they found that their insurance did not cover the employee fraud. Their Attorney also advised them that it was difficult and expensive to prosecute these cases and since the Accountant had nothing of value they would never recoup the cost.

So I ask, can you NOT afford internal controls?

e-Bookkeeping provides affordable wrap-around services to support your company’s Internal Control function. If you have questions about these services contact Diane Perusse @877-292-9684 ext 3, or diane@e-bookkeepingonline.com

What Can Your Small, Mid-Sized or Start-Up Business Have That the Fortune 500 Companies Have?

It happens almost every day. A large company, often listed in the Fortune 500, makes a strategic acquisition of a small entrepreneurial company to increase their product portfolio and to increase revenue . Usually when this occurs the small company core business remains very much the same as before the acquisition. After all, the large company typically prefers to maintain the core technology and entrepreneurial spirit existing in the acquired business. But for support functions that is not the case. The administrative infrastructure of the smaller company disappears being ostensibly outsourced to the parent company.

Why? The larger company already has an effective HR, Legal and Accounting infrastructure can absorb the administrative functions of the smaller company. When it comes to accounting this makes particular sense. An accounting department is expensive to form and sustain. It requires a skill set that is not often possessed by the entrepreneur founder/manager. Typically and effective and cost efficient accounting department contains at least four levels of staff and expertise: clerks/bookkeepers, accountants, controller, and CFO. Each has a defined role based on skill and compensation level.

Trained clerk/bookkeepers and deployed for recording daily transactions efficiently, timely and accurately. These staff are counted on to crunch through the data entry so that meaningful financial reporting can be prepared. These staff are unusually lower paid since they are not skilled in making reliable and accurate accounting decisions.

Degreed accountants supported the Clerk/bookkeeping staff tackling issues related to more challenging transactions and to provide best-practices guidance: Coding transactions for proper budget tracking and applying the matching principal. The accountant function is key to support proper internal controls by reviewing the work of the clerk staff and by preparing monthly balance sheet reconciliations. The accountant also performs analytical review preparation procedures prior to financial statement preparation.

The CPA level controller is more senior and seasoned than the accountant and enlisted by all excellent accounting departments. This key contributor provides guidance to all accounting contributors addressing the more complex accounting issues. Also the controller ensures internal control by reviewing financial statements and performing analytical review procedures.

At the top of the accounting department is the familiar CFO who guides the organization in its long term strategic goals. The CFO leads the organization in planning , guidance through the budgeting and planning process, and ultimately driving the financial plan. The CFO also represents the organization in forming strategic relationships with banks, insurance providers and the technology partners. The buck stops at this level.

Logically it can be an unnecessary overhead burden to continue to staff each of these roles in a small organization. Therefore, as a common practice, when large company purchases a smaller company one of the first measures taken to cut costs and increase the profitability of the purchased company is to eliminate the on-site accounting department and have the roles absorbed by the parent companies established accounting department. In effect, the accounting function has been outsourced with all the necessary functions provided by the parent company on an as-needed basis.

Your small, mid-sized or start-up company can and should realize the same benefits of the large company TODAY by outsourcing your accounting function to an organization that can provide each of these roles on demand. Rather than have a fully staffed department you pay for the service when it is required and keep your overhead and administrative costs at a level that maximizes profitability.

e-Bookkeeping provides the benefits of a large company outsourced accounting solution customized to fit your companies specific need and your company pays only for the services it needs.

2011 Brings Change in Employee's Portion of Social Security Tax Withheld

The employee’s portion of the Social Security tax, which is withheld from employees salary and wages during 2011, will be 4.2% of the first $106,800 of each employee’s taxable earnings. (The employee withholding rate of 4.2% is two percentage points lower than the 2010 rate of 6.2%.) Each employee’s earnings in excess of $106,800 are not subject to the Social Security tax.


The employer’s portion of the Social Security tax in 2011 remains at 6.2% of each employee’s first $106,800 of taxable earnings. There is no employer Social Security tax on any employee’s earnings above $106,800 during 2011.

In addition to the Social Security tax, the employee must have withholdings for the Medicare tax of 1.45% of every dollar of salary or wages. The employer must also pay a Medicare tax of 1.45% on every dollar of every employee’s salary or wages. Hence, the combined Medicare tax for 2011 remains at 2.9% on all employees’ earnings.


Self-employed individuals are responsible for paying both the employee and the employer portions of the Social Security tax and the Medicare tax

It is time to set some goals!!

It is pretty much an undisputed fact that setting goals makes things happen. I was out meeting with clients this week preparing budgets for next year. Since we work a lot with small business owners the first question is usually “what are your goals for next year”. That question started a great conversation with one of our clients. This particular client set a revenue goal last year and is very excited that this year they will make it and then thinking back he discussed how a few years ago he set a whole list of goals for himself both personally and professionally and that he has accomplished all of these goals with very little focus on these goals. He feels that just the process of setting the goals programs your brain and gives it a target to aim for.


So set a few goals and be brave about it. It certainly can’t hurt. As business owners I think it is not only important for us to set goals but to set goals for our employees and have our employees set a few too.

Here is a good ezine article on goal setting http://ezinearticles.com/?Rules-to-Setting-Business-Goals-and-Objectives:-Why-and-How-to-be-SMART&id=24276

Year-end is quickly approaching; it is not too late to consider charitable giving

Plan Year-End Charitable Gift Giving Planning to make charitable donations before year end? As Thanksgiving and the holidays approach, many people start thinking about making contributions and giving gifts. Americans are known for their charitable giving, plus of course, donations provide a tax break. But the tax laws that govern charitable deductions have changed in recent years. Here are the basic rules. Plus, we'll tell you about a way to get a bigger deduction when you donate a vehicle to charity. Americans donated more than $303 billion to charitable causes last year, according to the Giving USA Foundation. And while that represents a slight decline from the year before, Americans continued to give generously despite the economy.



The holidays are a popular time to make gifts. If you're getting ready to donate, be aware of the charitable tax deduction rules and some important changes that have been made in recent years.






Monetary Donation Guidelines


To deduct a charitable donation of money, regardless of the amount, a taxpayer must have a bank record or a written communication from the charity showing the name of the organization, as well as the date and amount of the contribution.






Here are some details about substantiation:


• Bank records include canceled checks, bank or credit union statements, and credit card statements.


• If you have a bank or credit union statement, it should show the name of the charity, the date, and the amount paid. Credit card statements should show the charity name, the date, and the transaction posting date.


• Donations of money include those made in cash or by check, electronic funds transfer, credit card, and payroll deduction.


• For payroll deductions, the taxpayer should retain a pay stub, a Form W-2 wage statement or other document furnished by the employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity.


These requirements for monetary donations do not change or alter the long-standing requirement that a taxpayer obtain an acknowledgment from a charity for each deductible gift (either money or property) of $250 or more. However, one statement containing all of the required information may meet the requirements of both provisions.






Rules for Donating Clothing and Household Items


To be deductible, clothing and household items donated to charity must be in good used condition or better. An item for which a taxpayer claims a deduction of more than $500 does not have to be in good used condition or better if a qualified appraisal of the item is filed with the return. Household items include furniture, furnishings, electronics, appliances and linens.






Deductions for Donating Vehicles


Tax law limits the amount that individuals are able to deduct when they donate vehicles to charity. (The same basic rules apply to boat and aircraft donations.) This provision has understandably discouraged charitable gifts of used cars.


However, there are exceptions that can result in a better tax deduction.


Years ago, you could deduct the full fair market value of a donated vehicle based on the "Blue Book" value or some other reasonable indicator. But tax officials felt some taxpayers overstated deductions for their run-down clunkers. Now, a charitable deduction for a vehicle valued above $500 is generally limited to the amount the charity receives from the vehicle's resale. Typically, a charity sells the vehicles it receives from donors. Many organizations promote programs specifically designed for this purpose.


There are exceptions that can provide higher deductions:


Exception #1: If the charity certifies that it intends to make a "significant intervening use" of the vehicle, which furthers the charity's stated purpose, you can deduct the full fair market value.


Exception #2: If an organization certifies that it intends to make a "material improvement" to the vehicle, you can also deduct the full fair market value. But simply cleaning, painting, or removing minor dents and scratches isn't enough. The improvement must increase the overall value of the car.


Exception #3: In addition, you can deduct the fair market value if the charity certifies that it intends to give or sell the vehicle to a needy individual at a price significantly below the fair market value. This exception applies only if the gift or sale is in direct furtherance of the charity's purpose of relieving poor, distressed or underprivileged people who are in need of a means of transportation.


Finally, note that a deduction of a fair market value is allowed for a gift of a vehicle valued at $500 or less.


If you qualify under one of the exceptions, the value can be determined through an established used vehicle pricing guide like the Blue Book. The guide must list the sales price for a vehicle based on the same make, model and year in the same condition, with the same or similar options, features, warranties and guarantees.


To help with your holiday-season and year-end giving, here are some additional reminders and rules:


• Contributions are deductible in the year made. So if you make a donation by charging it to a credit card before year end, it counts for 2010. This is true even if the credit card bill isn't paid until next year. Also, checks count for 2010 as long as they are mailed this year.


• It may be better from a tax standpoint to contribute certain appreciated assets to charity that have been held more than 12 months. That way, you avoid paying capital gains tax but can still deduct the full fair market value as a charitable deduction.


• Make sure the organization is "qualified." Only donations to qualified organizations are tax-deductible. IRS Publication 78, available online and at many public libraries, lists most eligible organizations. The searchable online version can be found at IRS.gov under " Search for Charities." In addition, churches, synagogues, temples, mosques and government agencies are eligible to receive deductible donations, even though they often are not listed in Publication 78.


• Only taxpayers who itemize their deductions can claim charitable contribution write-offs.


• If possible for property donations, including clothing and household items, get a receipt that includes the name of the charity, date of the contribution, and a reasonably detailed description of the donated property. If a donation is left at a charity's unattended drop site, keep a written record of the donation that includes this information, as well as the fair market value of the property at the time of the donation and the method used to determine that value. Additional rules apply for a contribution of $250 or more.


• The deduction for a motor vehicle, boat or airplane donated to charity is usually limited to the gross proceeds from its sale. This rule applies if the claimed value of the vehicle is more than $500.


• If the amount of a taxpayer's deduction for all noncash contributions is more than $500, an additional form must be submitted with the tax return.

What is the best Corporate Structure for an Early Stage Company?

By Cecilia Chen Esq.


What is the best Corporate Structure for an Early Stage Company?

As an attorney specializing in business entity formation, I have often been asked by my clients whether they should form an LLC or a corporation, specifically an S corporation. Unfortunately, the answer is never a simple one and it depends on a lot of different factors, such as relations between multiple owners, taxes and treatment of assets. By and large, there is no uniform "right" choice. A careful review of the details, strategies and goals of each business needs to be made before an entity structure is chosen.

There are, however, some basic similarities and differences between each entity. I have attempted to provide an overview of these key elements below. But please keep in mind, the information below, by itself, will not allow you to make a proper, informed choice of entity. This should always be done in conjunction with the assistance of your attorney and accountant.

Most start-up small businesses choose between LLC and S-Corporation to avoid double taxation that C-Corporations are subject to. Double Taxation means that all of the income of the C-Corporation is taxed once at the corporate level, then those same revenues are taxed again at the shareholder level when profits are distributed via dividends (please note that in smaller C corps., the double tax may sometimes be avoided by carefully zeroing out of net income each year by paying enough out to shareholder-employees). Shareholders must report any dividend earnings as capital gains on their personal tax returns.

LLC’s and S-Corporations are not subject to the double taxation that C-Corporations are, which is why most start-up businesses choose between LLC’s and S-Corporations. For the majority of small businesses, the relative simplicity and flexibility of the LLC make it the better choice. This is especially true if your business will hold property (such as real estate) that's likely to increase in value. LLC's are usually the entity of choice for real estate ventures for a variety of reasons, primarily due to the tax treatment of real property.

But an LLC isn't always the best choice. Occasionally, other factors may tip the balance toward a S-Corporation. Since both LLC and S-Corporation provide the same liability protection, the decision boils down to several points to consider:

Self-Employment Tax: One of the greatest benefit of a S-corporation is the ability to minimize self-employment tax. Profits of the S-Corp which pass through to the shareholders are not subject to self-employment tax (Social Security and Medicare which is approximately 15%). Rather, self-employment is only taxed on the portion classified as a "reasonable salary". Consult a CPA regarding “reasonable salary”. LLCs and sole-proprietorships must pay self-employment tax on all income.

Treatment of Losses: Deduction on losses in a S-Corp. is limited to the owner’s initial capital contribution; whereas there is no such limitation for a LLC.

Franchise Tax: Both LLC and S-Corp must pay the CA Franchise Tax board a minimum of $800 franchise tax on an annual basis; however the franchise tax is waived for the first year for S-Corporations. LLC on the other hand, must pay franchise tax its first year.

Distribution of Profit and Losses: In a S Corp, there is no special allocation of profit and losses for shareholders. Corporate profits and losses must be split up proportionately to the percentage of shares owned by each shareholder. LLC's on the other hand allow for flexibility as to how they split their profits and losses.

Ease of Conversion: In order to "convert" an LLC into a C-Corp, one actually has to go through a complete merger, whereby a new entity is created, which usually drops down a wholly owned subsidiary, that sub is merged into the LLC, leaving the LLC as the sub of the parent. In short, it’s complicated and makes the lawyers and accountants some extra cash.

Maintenance and Compliance: LLC has the advantage of having relatively few statutory formalities that need to be followed by the owners. The benefit of having limited formalities is that the risk of a claim being brought by a creditor for failure to follow corporate formalities is significantly decreased with LLCs, which reduces the owner's exposure to personal liability. On the other hand, once a S-Corporation is set up, it’s really not that hard to maintain either, especially if that task is delegated to an experienced attorney.

Possible Investments from Future Investors: Private investors and venture capital (“VC”) funds typically cannot (or don’t want to) invest in LLC’s. When a VC invests in an LLC, they risk getting an income tax called UBTI (unrelated business tax income). This type of income is frowned upon by investors in venture fund partnerships and most funds have a provision in their fund agreements that they will use best efforts not to bring UBTI into the partnership. As a result, VC funds shy away from investing in LLC’s. In contrast, converting an S-Corp to a C-Corp is simply a "check the box tax election” (or - actually – “unchecking the box”) - this can be done in a day with a single tax form. No lawyers, no accountants, no money. Therefore, while the LLC has some benefits, the costs of converting the LLC into a fundable entity is substantially higher and usually not worth the additional effort.

In conclusion, each entity structure has its unique advantages and disadvantages. Before choosing an entity structure for your business, a careful review of the details, strategies and goals of each business needs to be made in conjunction with consulting with an experienced attorney and accountant.

Ms. Cecilia Chen provides legal services throughout southern California concentrated in the areas of corporate transactional matters, estate planning, business organization and dissolution as well as bankruptcy. Cecilia received her law degree from American University in Washington DC and completed her undergraduate studies at Boston University majoring in business administration with a concentration in finance. Ms. Chen is licensed to practice law in both California and Virginia, and has extensive experience in representing clients ranging from small and emerging entrepreneurial businesses to large multinational corporations.

Please visit http://www.cclegalgroup.com for more information regarding the services provided by the Law Office of Cecilia Chen, or contact cchen@cclegalgroup.com